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Job market freezes as Japanese economy stalls

New figures compounded fears of a forthcoming recession in Japan just two days after new PM Taro Aso unveiled a $17bn emergency package. Consumer spending and industrial ouput both slipped as the job market froze to a near standstill.

Worries grew that Japan's economy was slipping into recession as job offers sank to their lowest level in four years, while consumer spending and industrial output tumbled.

The raft of gloomy data came on the eve of a key index of Japanese business confidence that is expected to have fallen into negative territory for the first time in almost five years.

Japan's unemployment rate rose to 4.2 percent in August from 4.0 percent in July with only 86 jobs on offer for every 100 job seekers, the lowest since September 2004, official figures showed.

The jobs market is "on a downtrend," a labour ministry official said. The figures added to the jittery mood among investors, with Tokyo stocks tumbling 4.1 percent to hit a three-year low after US lawmakers rejected a massive financial sector rescue plan.

Industrial production dropped by 3.5 percent in August from the previous month, which was the steepest fall since comparable records began in 2003 and worse than markets had expected.

The trade and industry ministry slashed its forecast for output in September, saying it would rise by 1.6 percent, not 3.4 percent as predicted a month ago.

Output is then expected to edge down 0.1 percent in October, said the ministry, based on a survey of manufacturers.

The economy is worsening more rapidly than company managers expected, said Hiroshi Watanabe, economist at Daiwa Institute of Research.

"There had been a common view that the economy would go through a mild correction but be spared a major recession," he said. "There will be more negative surprises ahead."

Japan's economy suffered its worst contraction in seven years in the second quarter of this year.

"We think it is reasonable to conclude that the Japanese economy entered a recession from the fourth quarter of 2007 since past experience shows that the production index declines for three or more quarters during slowdowns," analysts at RBS Securities wrote in a note to clients.

Consumer spending, another key pillar of the economy, also remains sluggish.

Household spending tumbled by 4.0 percent in August from a year earlier, a much bigger drop than expected, a separate report showed.

Naoki Murakami, chief economist at online securities company Monex, said a slowdown in hiring was curbing consumption.

"A rise in prices of daily necessities has reduced purchasing power in real terms and dampened consumer sentiment."

Markets are bracing for more gloomy news on the Japanese economy on Wednesday when the Bank of Japan will release the results of its closely watched Tankan survey of the corporate sector.

The headline index of sentiment mood among big manufacturers is expected to drop to minus one in September, turning negative for the first time since June 2003, according to economists surveyed by Dow Jones Newswires.

"Whenever this (index) has moved from positive to negative territory, it has -- without exception -- marked the start of an economic recession," noted Kyohei Morita, chief Japan economist at Barclays Capital.

Japanese companies are being squeezed by slowing economic growth and the fastest inflation in a decade.

But Japan's "current recession should be less severe and short-lived compared to those in 1990s and the economy should go back on a trend growth path by the fourth quarter of 2009," predicted UBS economist Akira Maekawa.